FY2022: The year of all pain, no gain

Sometimes, with markets in the red, prices weak and weakening, it’s hard not to feel alone and think that the worst is happening wherever you might be invested. On the ASX, for example.

And for many Australian investors FY2022 has felt like that – a change of government, surging inflation, rising interest rates, weakening house prices but the strongest jobs market we have ever seen and consumer spending still buoyant.

And yet, everywhere you look, the story is basically the same: all pain, no gain.

The pandemic kicked things off and continues to gnaw away at activity, heavy government and central bank support spending supported jobs and growth but started stirring prices but it was the Russian invasion of Ukraine in late February that ignited the touch paper and set off the fire that is still consuming markets.

And then winter came early for the crypto markets with the collapse of some leading operators, confusion about others and a 61% plunge in the value of bitcoin and worse to come according to more and more analysts.

It got worse for bitcoin right at the end of the half because in the last hours of June it fell under $US19,000 – a fall of more than 6% in an hour or so and the crypto looks certain to start the new quarter and half on an even weaker note than it finished.

But for all the losses, pain and confusion, credit ratings remain in place for most countries and rated companies, but losses, warnings and downgrades loom for countries and companies.

As a result, by the end of June (financial year for some, quarter or half year for others), Reuters was able to make two very apt points about what had happened to markets in the six months:

MSCI’s 47-country world stocks index has suffered its biggest June half drop since its creation in 1990 – 20.6% by the close of Wall Street on Thursday.

At same time, 10-year US Treasury bonds – the benchmark of global borrowing markets and traditional safe haven asset in times of volatility and stress – have had their worst first half since 1788 (That’s since Australia was founded, if anyone remembers their history).

Both are unprecedented.

Wall Street suffered its biggest first half fall in more than 50 years. The S&P 500 fell 20.6% in the first six months of 2022. The Nasdaq Composite slumped almost 30% and the Dow was down nearly 16%.

The Nasdaq lost more than 22% in the June quarter alone.

Inflation was warm before Russia’s invasion of Ukraine in late February which has been the single biggest factor that drove markets in all directions.

As Reuters again very aptly put it the invasion “supercharged what was already fast-rising inflation, forcing the big central banks to jack up interest rates and politicians to warn of new world orders.”

The accounting so far?

Well, preliminary figures reckon a $US13 trillion wipeout in world share prices a 15.5% plunge Japan’s yen, Italy’s worst bond rout since the euro zone crisis, a massive collapse in the crypto markets, led by bitcoin’s 60% plunge and thanks to oil, gas and coal one of the strongest commodities rallies in more than a century.

Of that loss in value, $US9 trillion is estimated to have come from the near 16% to almost 30% plus slump in US stocks, led by Nasdaq.

Around half – $US4.7 trillion in value was down to 10 stocks, led by the likes of Apple, Amazon, Netflix, Alphabet (Google) and Meta (Facebook).

Smaller amounts have been wiped from exchanges in Europe where the Stoxx 600 index has lost 17%, while in Asia MSCI’s Asia-Pacific index is off around 18% (in US dollar terms).

Oil prices jumped (Brent is up 40% so far this year, US crude just over 40%, natural gas is up 63%), thermal coal prices more than trebled according to the Newcastle ICE thermal index – from just over $US113 a tonne at the end of last December to $US380 a tonne on Thursday – and a peak around $US410 a tonne in late March.

But even as the half year and quarter ended the strength of that boom was being undermined – energy prices were remained around highs, but metal prices have sold off sharply with copper, lead, zinc, silver and gold all weaker, much weaker than they were in March in the immediate aftermath of the Russian invasion.

Gold lost just over 1% for the half but nearly 7% for the three months to June.

Copper is down nearly 20% since March, its biggest quarterly fall since early 2020’s pandemic plunge. That saw copper down more than 17% for the first half of the year.

Nickel and zinc have slid 20% and 25% respectively. Nickel’s fall all the more remarkable after the London Metal Exchange squeeze debacle in March saw the price surge to more than $US100,000 tonnes.

Now it’s down sharply and the fears of a recession and weak demand from China are the main drivers, as they are for copper and other metals.

Even as China’s economy recovered in June, doubts remain how strong the rebound is and whether the country can resume growing.

Iron ore was mixed – up, down, sideways and ending June around $US117 a tonne for 62% Fe fines delivered to northern China, according to the Singapore Exchange’s futures market.

It ended 2021 at a smidge under $US118 a tonne so no gain.

But the price hit a 12-month high above $US143 a tonne on June 8 and by June 22 had plunged to a six-month low of just over $US107 a tonne.

Wheat prices surged to close $US13 a bushel in Chicago in March but have come off in the past month to trade just over $US9 a tonne (down more than 14%) but still up 19% this year.

Besides the shakeout in equities, the long boom in bonds ended as yields surged.

Slow out of the gates central banks didn’t help as they fell behind in taking inflationary pressures seriously.

The rapid rise in costs and prices in March through May sorted all that out and the Fed revealed at 0.75% rise in its key rate, the Reserve Bank of Australia a half a per cent and the NZ central bank, two half a per cent rises and five in all this round. All to get ahead of the curve on inflation.

US 10-year Treasury yields leapt from less than 1.5% to 1.8% in January, knocking 5% off world shares in January alone.

Fast forward and that yield is now at 3.1% and has been as high as 3.48%.

US bonds have lost more than 13%, the most since 1788, according to Deutsche Bank.

Shares are down – 10.2% for the ASX 200 in 2021-22 and more than 13% so far in 2022 which is a lot better than the sharp falls on Wall Street and in Europe.

Local super funds are looking at losses of 8% to more than 10% for 2021-22, depending on their investment mix.

Inflation is at a 40-year high – over 8% in the US, 5% in Australia – and heading for 7% or more by year’s end and 9% in the UK.

Australian 10-year bond yields ended June just over 3.7% – they hit 4.12% on June 20 and are up 2.08% since the start of the year and 2.21% since July, 2021.

The 10-year Australian bond yield had ended 2021 at 1.63% and more than doubled in six months, producing big losses for investors in fixed interest.

The Australian Consumer Price Index hit an annual 5.1% rate in the three months to March, up from 3.8% in June, 2021. The jobless rate of 3.9% in May was down sharply from 4.9% in June, 2021.

The Aussie dollar ended June around 69 US cents and looking a touch weak. It ended 2021 around 72 US cents and is down 5.2% year to date and 8% in the June quarter.

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The CSI 300 index of Shanghai- and Shenzhen-listed stocks was up nearly 10% in June. That’s the biggest one-month rise since July 2020, when global investors snapped up Chinese shares as the country exited its first round of Covid-19 lockdowns ahead of the rest of the world.

China’s cut to quarantine requirements for international arrivals from two weeks to one this week was the first significant relaxation of travel restrictions since authorities brought Covid outbreaks in Shanghai and Beijing under control in early June.

We saw signs this week the economy is reviving but the Covid threat remains real and lacklustre demand across the economy will continue for a while after the post lockdown surge calms down (as it did in 2020 after the first lockdown).

But as welcome as June’s bounce was, the markets are still in the red for 2022 with the CSI 300 off around 8% year to date.

But Chinese stocks are on the cusp of the traditional definition of a bull market, since they’re up almost 20% from their trough. That will be a faux bull market.

Japan’s Nikkei index was down 9% for the June half, but the big story in that market is the slump (collapse?) in the value of the yen against the greenback. The 15% slide in the value of the yen is boosting import costs for a host of commodities, most notably energy products like oil, gas and coal.

But then the Bank of Japan – which has, alone among the major central banks, not abandoned its ultra-loose monetary policy and lifted rates, has been trying to get inflation to 2% and stay there for a decade without any success.

The 2.5% annual rate in May was unchanged from April’s seven and a half year high and would be considered to be OK in Australia and the US – in Japan, its high inflation.

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The ASX 200 index sank 2% on the final day of the financial year, or 132.1 points, to 6,568. That’s after ending 2020-21 around 7,330.

Year to date in 2022 the loss is just over 10%, when is considerably better than the performance by Wall Street where the Dow did best with a 15% plus fall.

The S&P 500 was off 20% year to date (and 16% in the June quarter) while Nasdaq slumped nearly 30% for the year to date.

The FAANG stocks (an anachronistic misnomer after Facebook became Meta Platforms) fell more than 32% in the year to June, putting paid to the idea that they were the growth hub of Wall Street.

And while investors moved to value (hence the smaller fall in the value-based Dow index) as interest rates rose, it was no protection especially as bond yields surged.

Apple shares lost 24.8% in the half but its market value remains well above $US2 trillion. Facebook (Meta) shares more than halved – losing 52%, Alphabet (Google) shed 24%, Netflix lost massively, down a huge 70%, Amazon shares dropped 37% and Microsoft fell 23%.

Exxon shares though added more than 34%, Chevron, 21.4% and Occidental a huge 89% as oil prices soared.

But in the case of the latter two, an added influence was share buying by Warren Buffett and his Berkshire Hathaway.

That buying and the speculation it encouraged saw Berkshire shares down just under 10% for the half year, easily outperforming all major market measures.

At the halfway mark, Buffett is again having the last laugh over all those ’star’ fund managers, investors and analysts who a year ago and more who were claiming Buffett and his style of investing (heavily value driven) were out of date.

The 9.98% fall in Berkshire’s share price is well ahead of the near 16% slide in the Dow and the 20.6% slump in the S&P 500.